Can Canada Revenue Agency Garnish Self-Employed Income to Recover Student Loans?
Many individuals facing student loan debt in Canada have unique financial situations that can make repayment challenging. In this article, we explore a case where a self-employed individual, who has been defaulting on their student loans, wonders about the possibility of the Canada Revenue Agency (CRA) garnishing their income. This piece aims to clarify the complex and often confusing rules surrounding the garnishment of self-employed income by the CRA.
The Complexities of Self-Employment and Student Debt
Our story begins with an individual who graduated 12 years ago and has been self-employed as a freelance contractor since that time. Due to a combination of factors, including limited financial resources, this person has found it extremely difficult to meet their financial obligations. They currently live in an apartment with extreme water damage and black mold, and their income barely covers basic living expenses.
The Path to Student Loan Debt
Like many graduates, this individual took out both provincial and national student loans to pay for their 4-year degree. However, unlike their peers, they did not receive any grants due to their parents' income being deemed too high. The loan repayment journey began shortly after graduation with the first year's bank portion being cleared. Since then, the person has been making minimum payments on their provincial and national student loans, despite facing multiple financial challenges.
The Challenges of Default
When the individual was unable to make payments for several months and temporarily worked outside the country, they realized that the CRA has very strict rules regarding student loan repayment. Specifically, they learned that the absence of a court-ordered garnishment and the fact that they could not maintain a repayment plan made their loan ineligible for assistance. The only way to get their loan back in good standing was to pay a large lump sum of $7,000, which was unfeasible.
The Rise of Student Loan Debt Default
Despite making sacrifices, including living in substandard housing conditions and eating simple meals, the interest on the loan continued to accrue, turning the repayments they had made into a mere drop in the bucket. The individual reached out to the CRA several times to negotiate a more manageable payment plan, but the response was consistently a demand for at least $500 per month, which was unaffordable.
The Potential for Income Garnishment
As a freelancer, the individual is concerned about the possibility of their income being garnished by the CRA to recover the defaulted student loans. The fear is that their clients might be contacted, leading to their loss of business. This concern is particularly pertinent as the CRA can garnish income without a court order or prior notification to the debtor.
Legal and Financial Implications
It is important to understand that the CRA has specific provisions for garnishing income, especially from self-employed individuals who are in default. Under the Canada Student Loans Program, the CRA can apply for a garnishment order to seize money before it reaches the debtor. However, there are exceptions for individuals with low income.
The Financial Consumer Agency of Canada (FCAC) provides guidelines to help individuals facing these situations. For freelancers and self-employed individuals, the CRA typically requires an income level that is substantially above the poverty line before considering garnishment. For those on the lower end of the income spectrum, the CRA is more likely to negotiate or propose alternative payment plans.
Therefore, while the individual's income level is currently at a subsistence level, the CRA might be more inclined to work with them rather than immediately resorting to income garnishment. The key is for the individual to communicate openly with the CRA and provide detailed documentation of their financial situation.
Conclusion
The case of self-employed individuals like the person described is complex and multifaceted. While the CRA has the authority to garnish income, it is not solely a punitive measure. Legal and administrative exemptions exist to ensure that the burden on those with very low incomes is manageable. Seeking professional advice from a financial advisor or legal expert can help navigate these challenging circumstances.
For individuals struggling with student loan debt, the CRA offers various resources and assistance programs. Understanding one's rights and options can alleviate some of the stress and uncertainty associated with this difficult period.